Question:

Are there any problems associated with wrapping hot water tanks (e.g., rusting of tanks, overheating)? Should new hot water tanks be wrapped?

Answer:

There appears to be no hard evidence to either substantiate or refute any claim
that wrapping hot water heaters with insulation will directly cause the tank to
rust and fail prematurely. Our Energy Library searched but found no studies to support
any rusting claims. I also talked to some plumbers I know and they hadn’t heard of any substantiated cases of tank degradation from wrapping hot water heaters. Failing a study to support the claim, let’s look at it logically.

Rusting of the tank is one problem and its longevity is another. Rust is usually caused by excessive moisture. Why should insulation around a dry tank cause excessive moisture? There are really only two ways for moisture to get under the insulation
wrap: through condensation or a leak of some kind. Vapor in the air reaching the dew point and condensing happens on cool surfaces that are below the dew point – and this won’t
happen at the elevated temperatures you find under the insulation wrap. The other possibility is a small leak in the heater or one of the plumbing joints coming into the heater. If there is a slow leak in the tank or water is getting under the tank, then, yes,
a jacket could hold in more moisture and cause premature rust. Obviously, rusting is not desirable. But unless the rust on the outside of the tank is quite severe, it would
have a minimal effect on the actual performance of the water heater. The tank itself should certainly not rust any more with a jacket than without, and, again, the rust would have to be very severe to have a noticeable effect on performance or longevity.

Having said that, water heater wraps can overheat tank wiring and prematurely burn out thermostats and heating elements on electric water heaters if installed incorrectly. Be sure to leave combustion air and venting penetrations open. Wraps should NEVER cover access panels to either the heating elements or the thermostat of the water heater. Wrapping over these areas allows excess heat build-up at these components and may cause them to fail prematurely. If these access panels are left uncovered by the blanket, there should be no impact from wrapping water heaters.

With natural gas water heaters, it's a good idea to check with your gas utility for advice on what types of blankets are safe to use. Be careful not to cover any venting areas on gas hot water tanks.

On the matter of new hot water tanks, it is important to consider the Energy Guide Label in selecting a storage water heater that best meets your needs. New, high-efficiency water heaters and instantaneous water heaters probably will not need to be insulated with an external jacket. Many of them have enough factory-installed insulation built inside. Follow the manufacturer’s instructions. These water heaters may have a statement posted on the tank noting that installation of additional insulation will void the warranty.

You can check to see if your hot water storage tank is losing heat. Place one hand on your hot water tank and your other hand on something metallic (e.g., shelf, tool box)
nearby. If the other metal feels cooler to the touch than the water heater tank, then there is heat loss from the tank. If there are no posted restrictions about adding an exterior tank wrap, go ahead and do so, following tank manufacturer’s guidelines.

When the water heater is installed, two additional steps are recommended. Both of these measures will also help reduce heat loss from the tank:

Insulate the hot and cold water pipes (all that is accessible) to within 18 inches of the water heater. Yes, wrapping the cold water pipes is important, too, because hot water from the tank is pulled up into the cold water pipes due to thermosiphon action.

If the water heater is to be placed on a concrete slab, place a two-inch R-10 foam board under the tank.